Not Sexy, But Useful - Investing Gold in DeFi Way

First of all, why should I invest in gold rather than Bitcoin? Yes, Bitcoin could replace gold, becoming the ultimate risk-off asset, ultimate wealth reserve asset. But we are still in the early stage of crypto adoption, and $BTC remains highly volatile. Gold still plays a non-neglectable role in any portfolio as a stabilizer. With global unrest, inflation, and heightened market volatility, gold is poised to come back to shine in the coming years.

In recent market turmoil, gold has shown its remarkable risk hedging ability amid a geopolitical conflict.

Source: Trading View

And for the past 100 years, gold has performed spectacularly as an inflation hedge. Most major currencies have depreciated more than 99% in value against gold.

Source: Financial Horse

It is always a good idea to allocate a portion of wealth into gold. Traditionally, we can invest Gold through paper gold, gold ETF, or physical gold. All these methods are viable, however, the recent news regarding financial sanctions has shown us that as normal people how fragile we are when facing unexpected freezing of our financial account. Centralized ways to hold gold, such as paper gold and gold ETF, are dependent on custodians or counterparty to fulfill their responsibility. While holding physical gold ensure self-ownership, it is cumbersome to carry and could incur substantial storage cost.

So, how could we do this in a decentralized, self-ownership manner?

There are two main product categories in crypto that enable investors to gain exposure to gold. Tokenized gold and synthetic gold.

Tokenized Gold

Two of the largest stablecoin issuer, Paxo and Tether, all have their respective tokenized gold product. Like USD stablecoin, tokenized gold is physical gold hosted by the issuer and issued the representative token on the blockchain.

Paxo Gold (PAXG)

Paxo, the stablecoin issuer for $USDP and the stablecoin as a service provider for $BUSD, has a gold coin $PAXG – an ERC-20 token.

One $PAXG token represents one ounce of physical gold of a gold bar stored in vaults in London. The token can be redeemed into physical gold.

The price of $PAXG exactly tracks the gold price per ounce. Since February, the market cap has soared as the escalation of geopolitical risk, this evidenced that crypto investors have also rushed into gold as a defensive play.

Disadvantage: Paxo is a regulated company in the US, and is obliged to follow US law. In its whitepaper, the company state that it has the right to freeze the Paxo Gold balance of any address on-chain to follow any financial sanction implemented by the government. It can also wipe the balance of an address after it is frozen to allow the appropriate authorities to seize the backing assets.

Tether Gold (XAUT)

$USDT issuer Tether has tokenized gold product, $XAUT. This product is very similar to that of Paxo, each $XAUT coin represents one ounce of physical gold and can be redeemed into physical gold. This gold coin ranked second in terms of market cap at $484M, compared to $PAXG at $618M as of 18 March.

Tether is not a regulated company, its stablecoin $USDT has long been criticized for its opacity of underlying assets. The same problem applies to Tether Gold, we don't know whether it has the full amount of gold to back their gold coin issued.

We are using USDT because of their record of good performance in long run, so we need the same kind of belief to invest in Tether gold.

Synthetic Gold Product

A synthetic asset is a tokenized derivative that mimics the value of another asset. Holding synthetic asset is holding a contract that tracks the underlying asset's price without the need to hold the actual underlying asset. Crypto synthetic market is led by Synthetix with Mirror Protocol on Terra ecosystem being second in this market.

Mirror Protocol currently provides the synthetic iShare Glod Trust, $mIAU. iShare Gold Trust is an ETF product by BlackRock, the fund seeks to reflect the performance of the price of gold.

Source: https://mirrorprotocol.is/#/farm

Benefits of Holding Gold in Crypto

Holding gold exposure in crypto enjoys many benefits of decentralized finance, easy to trade, convenient to hold, available to anyone. Although some products like $PAXG reserve the right to freeze any address required by government sanctions, in practice it is difficult to identify the owner of any particular Ethereum address. Small investors could rest in peace holding tokenized gold in their wallets without any worry facing unexpected freezing of assets.

Yield for Gold

There is another interesting benefit - yield for gold. Gold is not a productive asset traditionally, you cannot earn any yield by holding gold. However, by providing liquidity to trading pairs in AMM DEX, you can earn a trading fee as well as liquidity mining incentives, if any. There will be an impermanent loss, but consider this gold, you are not expecting large volatility, a 20% yearly change in price is already huge for this asset. A simple calculation shows that impermanent loss is actually not a major concern.

Source: https://whiteboardcrypto.com/impermanent-loss-calculator/

The above calculation shows gold price against stablecoin, with a 20% increase in the gold price, the impermanent loss is only 0.41%. You can be quite sure the yield earned through LP can exceed the small impermanent loss.